How Lease-Purchase Agreements Work

A lease-purchase agreement, or lease-purchase agreement, is a legal document that presents the terms for a transaction in which a landlord or seller leases residential or commercial real estate to a potential buyer or renter, who must then purchase that property at the end of the lease term. A lease-purchase agreement is a form of rent-to-own agreement, also known as a lease-purchase contract or lease with the option to purchase contract.

Signing the lease-purchase agreement gives the buyer or renter exclusive rights to purchase the property for a non-refundable option fee in the form of an upfront security deposit. During the leasing period, the seller cannot sell the property to another party. Alternately, the buyer can purchase the property at any point before the end of the leasing term once they qualify for a mortgage loan from a lender.

This purchase option can benefit buyers who don’t have enough money to make a down payment on a home purchase or need time to resolve credit score problems. It can also be helpful to property owners, especially those selling in a competitive real estate market; the lease-purchase agreement also allows them to draw rental income and charge a higher rental fee for the property.

Lease-purchase agreements are not regulated, and potential buyers with questions about leasing terms should seek advice from real estate agents or real estate attorneys. The following is an overview of the process surrounding the signing of a lease-purchase agreement:

1. 1. The buyer agrees to the purchase price. To complete the first step of the lease-purchase agreement, the buyer must agree on the seller’s purchase price. The purchase price is the price of the home, based on fair market value (the agreed-upon price based on current market trends and comparative market analysis), regardless of the property’s current value. (Home values often fluctuate.) The purchase price is set either before signing the agreement or at the end of the lease period.
2. 2. The seller details the terms of the lease. The seller determines the length of the lease period, typically up to three years, and the amount of the monthly rent payment. The seller and buyer must agree on special terms, such as selecting which party is responsible for closing costs and maintenance fees.
3. 3. The buyer pays the option fee. Once the parties agree to the terms, the buyer must pay the option fee. This upfront, non-refundable security deposit, which gives the buyer the right to purchase the property at or during the lease period, is often kept in an escrow account. The parties can negotiate the fee, though it’s usually between one and five percent of the purchase price.
4. 4. The buyer pays monthly rent. The buyer pays the monthly rent for the property for the agreed-upon period of time. A percentage of the rent is designated as rent credit, which the seller will apply to the purchase price at the end of the lease period.
5. 5. The buyer purchases the property. A lease-purchase agreement requires the buyer to purchase the home or property at the end of the lease period. After the rent credit is applied to the purchase price, the buyer will apply for a mortgage and complete the purchase once they qualify.

The difference between a lease-purchase agreement and a lease option is the buying requirement at the end of the lease. In a lease-option contract, the buyer has the right to buy the property but is not legally obligated to do so. However, they will be required to vacate the property and lose any rent credits or down payment.

In a lease-purchase agreement, the buyer is legally obligated to purchase the property at the end of the lease, even if they are not financially able to do so or obtain a mortgage loan. They may also be subject to legal action by the seller for breach of contract.

All investments, including real estate investments, come with inherent risks which may involve the depreciation of assets, financial losses, or legal ramifications. The information presented in this article is for educational, informational, and referential purposes only. Consult a licensed real estate or financial professional before making any legal or financial commitments.

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